Chapter 6 - Financial Planning: Long-Term and Short-Term
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Chapter 6 - Financial Planning: Long-Term and Short-Term

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Chapter 6 - Financial Planning: Long-Term and Short-Term Presentation Transcript

  • 1. Chapter 6 FINANCIAL PLANNING: LONG-TERM AND SHORT-TERM © 2003 South-Western College Publishing ENTREPRENEURIAL FINANCE Leach & Melicher
  • 2. CHAPTER 6: LEARNING OBJECTIVES
    • Understand the concept of a sustainable sales growth rate
    • Understand the process of identifying when and how much additional funds will be needed to support the venture’s sales forecasts
    • Develop an understanding of the impact of varying sales growth rates on the amount and timing of additional funds needed
  • 3. CHAPTER 6: LEARNING OBJECTIVES
    • Describe the percent of sales method for preparing long-term financial plans
    • Explain why projected statements of cash flows are important to the entrepreneur
    • Describe how projected statements of cash flow relate to cash budgets
  • 4. VENTURE LIFE CYCLE DEVELOPMENT STAGE STARTUP STAGE SURVIVAL STAGE LIQUIDATE RESTRUCTURE RAPID GROWTH STAGE GO PUBLIC SELL OR MERGE MATURITY STAGE
  • 5. VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS
    • Development Stage:
    • Screen Business Ideas
    • Prepare Business Plan
    • Obtain Seed Financing
    • Startup Stage:
    • Choose Organizational Form
    • Prepare Initial Financial Statements
    • Obtain First Round Financing
  • 6. VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS
    • Survival Stage:
    • Monitor Financial Performance
    • Project Cash Needs
    • Obtain First Round Financing
    • >Possible Actions: Liquidate v. Restructure
    • Rapid Growth Stage:
    • Create and Build Value
    • Obtain Additional Financing
    • Examine Exit Opportunities
    • >Possible Actions: Go Public v. Sell/Merge
  • 7. VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS
    • Maturity Stage:
    • Manage Ongoing Operations
    • Maintain and Add Value
    • Obtain Seasoned Financing
  • 8. FORECASTING SALES OR REVENUES
        • Forecasting for Early Stage Ventures: Firms that are in either
        • their development, startup, or survival stage, or just entering
        • into their rapid growth stage of their life cycle.
        • Industry Probability of Sales Component
        • Sales Scenario Occurrence Growth Rate Weight
        • Optimistic forecast .30 X 60% = 18.0%
        • Most likely forecast .40 X 50% = 20.0%
        • Pessimistic forecast .30 X 40% = 12.0%
        • 1.00 Expected Value = 50.0%
  • 9. ESTIMATING SUSTAINABLE SALES GROWTH RATES
    • Internally Generated Funds: Net income or profits after taxes earned over an accounting period
    • Sustainable Sales Growth Rate: Rate at which a firm can grow sales based on the retention of profits in the business
  • 10. ESTIMATING SUSTAINABLE SALES GROWTH RATES
  • 11. ESTIMATING SUSTAINABLE SALES GROWTH RATES
  • 12. ESTIMATING SUSTAINABLE SALES GROWTH RATES
  • 13. ESTIMATING ADDITIONAL FINANCING NEEDED TO SUPPORT GROWTH
    • Financing Capital Needed (FCN): financial funds needed to acquire assets necessary to support a firm’s sales growth
    • Spontaneously Generated Funds: increases in accounts payables and accruals (wages and taxes) that occur with a sales increase
  • 14. ESTIMATING ADDITIONAL FINANCING NEEDED TO SUPPORT GROWTH
    • Additional Funds Needed (AFN): financial funds still needed to finance asset growth after spontaneously generated funds and any increase in retained earnings have been used
    • AFN = Required Increase in Assets – Spontaneously Generated Funds – Increase in Retained Earnings
  • 15. AFN EQUATION
  • 16. AFN CALCULATIONS
    • Sales last year = $1,600,000
    • Asset investment = $1,000,000
    • Net Income = $160,000
    • Current Assets = $520,000
    • Fixed Assets = $480,000
    • Accounts Payable = $48,000
    • Accrued Liabilities = $32,000
    • Projected next year sales = $2,080,000
  • 17. AFN CALCULATIONS
  • 18. PROJECTING OR FORECASTING FINANCIAL STATEMENTS
    • Percent of Sales Method: make projections based on the assumption that certain costs and selected balance sheet items are best expressed as a percentage of sales
    • Constant Ratio Method: variant of the percent of sales method that projects selected cost and balance items at the same growth rate as sales
  • 19. PROJECTING OR FORECASTING FINANCIAL STATEMENTS
    • FINANCIAL FORECASTING PROCESS TO PROJECT FINANCIAL STATEMENTS
    • 1. Forecast sales
    • 2. Project income statement
    • 3. Project balance sheet
    • 4. Project statement of cash flows
  • 20. GAME TOY INCOME STATEMENTS (2001 Actual, 2002 Projected)
  • 21. GAME TOY BALANCE SHEETS (2001 Actual, 2002 Projected)
  • 22. SHORT-TERM CASH PLANNING TOOLS
    • Sales Schedule
    • Purchase Schedule
    • Wages and Commission Schedule
    • Cash Budget
  • 23. PDC COMPANY OPERATING & CASH BUDGET
  • 24. PDC COMPANY OPERATING & CASH BUDGET
  • 25. PDC COMPANY OPERATING & CASH BUDGET
  • 26. PDC COMPANY OPERATING & CASH BUDGET
  • 27. PDC COMPANY OPERATING & CASH BUDGET